Search This Blog

Friday, April 20, 2012

The ECB loads up on PIIGS exposure

Reuters MacroScope blog covers some of our updated figures on the exposure of the ECB to the struggling peripheral countries. Following the ECB’s Long Term Refinancing Operations (LTRO) the ECB’s exposure to these countries has increased significantly, without their situations showing any sign of improvement – in fact many of them are now in a worse position.

Last year we showed that the ECB exposure to the PIIGS totalled €444bn. Just a year later this has increased by a whopping 106%, to €918bn. The exposures are detailed below:

This gives the ECB a massive leverage ratio 38.4:1. This in itself is not the issue, more concerning is the fact that a third of the ECB’s balance sheet now resides in the PIIGS.

On top of this, while the ECB’s exposure has been rising the quality of collateral supporting this exposure has been deteriorating quickly. There are a few factors underlying this:

- The value of the huge amount of PIIGS sovereign bonds which PIIGS banks hold has fallen while the default risk involved with them has risen quickly.
- The sovereign guarantee which backs up many of these banks (both explicit and implicit) has also become less solid as the states’ finances worsen and public outrage against bank bailouts increases.
- The risks and losses held on the balance sheets of these banks is yet to be fully acknowledged or fully realised in many cases. (For example, see our recent briefing on the massive problems in Spanish banks relating to their exposure to the bust real estate and construction sectors).
- The ECB has widened its collateral scope allowing even more opaque and harder to value collateral to be used to bank up its unlimited liquidity provision.

That is to name but a few of the issues in play (we'll have a fuller discussion of the implications of this next week).

The real question which should be asked in all this is: how has the eurozone crisis continued to worsen despite the ECB more than doubling the money it has poured into these states?

Patently, the current approach to the eurozone crisis has failed. Even the ECB’s massive interventions only bought a short amount of time (and a lot less than many may have expected). The eurozone continues to fiddle at the edges of the crisis. All the talk of ECB lending, eurozone firewalls, IMF resources and austerity programmes fails to accept some of the fundamental flaws which underpin this crisis.

The eurozone needs to accept that there are a few structural flaws underpinning the eurozone crisis and move to correct them, not least: an endemic lack of competitiveness in the peripheral states, a structural bias towards low growth, a massively undercapitalised banking sector, mismatched monetary policy and a currency which remains grossly overvalued for many of its members. Until these issues are tackled, with both widespread political and economic will even further sprays of ECB liquidity will do little more than buy time, while further raising the cost of the potential break-up.

Update

The figures on exposure through lending programmes were obtained from the websites of the national central banks of:

Costs will simply run up the longer it takes.Southern PIIGS simply need to lower their standards of living to a sustainable (aka not financed by others) level. This probably requires 20-30% adjustments (and more for soem).

If these adjustments are made in steps of 1-2% annually it takes a long time. If this proces is financed by more loans as we see now overall debt will rise further.

Furthermore as private investors are running away from it. Not only there is an increase of the total amount but also from private to public (aka as the tax-payer).

The problem of course is that cutting half of their welfarestate is necessasy as well as 10s % cutting in the numbers of civil servants. Which can apparently not be sold to voters. So now it is effectively sold to the Northern neighbours and their voters.

Unless there will really be real structural measures or the North stops paying for the deferring this process will simply go on.

In this respect it is simply throwing good money after bad giving the IMF more resources. At the end of the day it simply allows the Southern PIIGS to go slower with measures that have to happen at the end anyway.